Debt

Last June we pre-paid our home heating oil for the 2009-2010 winter heating season.  Oil was between $65-70 a barrel and I believed there was good chance the price of oil could go much higher.  Of the three payment plan options offered by my local oil delivery company (see below), my family and I felt that pre-buying our home heating oil would be the most economical option.

These were my payment options as of June 29, 2009:

Spot Delivery Price: In June of 2009 the spot price for oil delivery was $2.39/gal. If we agreed to this plan there would be no contract, but I wouldn’t have any protection if the price of oil were to suddenly (or gradually) rise.

Budget Plan Price: This plan involved calculating the “expected” amount my home would use during the winter heating season and spreads the payment out over 10 months. In the North East, you might spend $800 in a typical January or February heating your home. The budget plan allows you to spread this burden out over 10 months (depending on your delivery company) so you are not faced with a HUGE heating bill for the coldest months. The 10 payment budget plan was $2.64/gal if I wanted protection from the spot price of oil rising higher than $2.64/gal I would have to pay 25 cents more per gallon than the spot delivery price.

Pre-Buy Plan: Finally I had the option of pre-buying my oil for $2.29/gal if I paid with cash or check, this plan offered the lowest initial cost for the fuel, but I would not benefit from any decreases in the cost of oil as was the case in 2008 when the price of heating oil went from over $4.50/gal to $2.30/gal.

So, was PRE-BUYING our heating oil the right decision this year?

This Friday, the oil delivery truck came to our house to fill up our tank.  We received 174.1 gallons of fuel at the current spot delivery price of $2.75/gal.  However, since we had pre-paid our oil at the rate of $2.29/gal, we ended saving over $78 this fill up!

When you pre-buy your home heating oil, you’re “gambling” the price of oil will not decrease during the period you actually expect to use the fuel.

In 2008 when home heating oil was very expensive (over $4.50/gal), I felt there was a good chance that heating oil could fall in price.  I would have received a very slight discount if I had pre-paid my home heating oil (about 10 cents a gallon), but I would be locked into that price if oil were to become cheaper. 

The price of oil did eventually fall in 2008 and fortunately I had opted for the price protection option that year.

We got “lucky” again this year making it the 4th year in a row I’ve successfully predicted the best heating oil purchase option!  This summer I will be giving my predictions for 2010-2011 heating oil prices; STAY TUNED!